Lender says Leviev firm scheming to wipe out $79M mezz piece

By Adam Pincus | July 30, 2009 11:18AM

Lev Leviev (left) and the former New York Times Building

A private equity firm that helped fund the $525 million purchase by Lev Leviev’s AFI USA of the former New York Times Building in 2007 is accusing the buyer of scheming to wipe out the lender’s $79 million mezzanine position.

The mezzanine lender, Stamford-based Five Mile Capital Partners, charged in a 30-page breach of contract lawsuit that AI Holdings (USA), a subsidiary of AFI USA, is overstating a loss in value of the building to trigger a technical default that would permit the senior lender, Banco Inbursa of Mexico, to foreclose on the property.

The property value was marked down from $690 million following the purchase to $315 million as of December 2008, the filing says, creating the event of default.

Once a default has occurred, a $72 million interest reserve account could be used to pay the senior mortgage and the entire debt structure could be reorganized, wiping out the mezzanine positions held by Five Mile Capital, CIT Group and Blackrock, the court papers say.

Furthermore, the scheme gives Leviev’s company a promise of future increases in value through a so-called “hope certificate,” the complaint, filed in New York State Supreme Court July 16, alleges.

Five Mile Capital accuses the borrower and lender of: “Conspiratorial, bad faith and predatory conduct… in manufacturing and declaring a trumped-up and pretextual default,” the suit says. CIT Group and Blackrock were not parties in the suit.

Infighting among borrowers and lenders in deals negotiated at the height of the market is expected to increase, experts said. Last month, Five Mile Capital filed suit in a case pitting different tranches of a securitized loan against one another.

AFI USA attorney Stephen Meister, a partner at Meister Seelig & Fein, called the suit “frivolous,” and predicted it would not survive for long.

“All [the] write-downs were entirely proper, supported by third-party appraisals and followed well-known market corrections beginning in the last quarter of 2008,” he said in an e-mail.

Five Mile Capital said in the complaint that the structure was worth more than $550 million.

Leviev’s AFI Group bought the Times’ former office building at 229 West 43rd Street between Seventh and Eighth avenues for $525 million, and then poured in another $175 million in renovations for the nearly century-old building.

The total debt on the building included a $475 million first mortgage; and four mezzanine loans totaling $236 million, which included the $79 million Five Mile Capital piece, $40 million held by CIT Group and $39 million held by Blackrock, the complaint says.

A foreclosure would allow a reorganization of the building’s debt and wipe out the mezzanine positions for Five Mile Capital, CIT and Blackrock, the suit claims.

The rehabilitation of the 675,000-square-foot building is 90 percent complete and the $72 million remains for just interest payments and construction expenses, and will last another 10 months, Five Mile Capital says in the complaint.

But, Leviev and the lender want to divert that money for the senior lenders only, the suit alleges. The notice of technical default sent to Five Mile Capital in June said that the net worth of AI Holdings had fallen below $400 million and it had less than $10 million in liquid assets, the complaint says.

The suit seeks a judgment denying there was a technical default and asks the judge to block any foreclosure or related proceedings.

Barry Hersh, a clinical associate professor at the Schack Institute of Real Estate at New York University, expected more similar infighting.

“It may be between one group of lenders against another group of lenders. They will sort out in different ways,” he said. “But there will absolutely be more disputes in the various pieces of the capital stack over who has control.”